Sunday, October 19, 2008

According to the usual market tests, the self-help industry seems to be successful. People are prepared to pay substantial amounts for the goods it offers and it seems reasonable to presume that they obtain benefits that are commensurate with the amounts they pay. But some people claim that these benefits are illusory. Does the self-help industry just produce psychobabble that gives people false hope? Or, does this industry assist people to achieve lasting gains in happiness?

Although the research has not yet been done that would enable these questions to be answered in a definitive way, a recent issue of “The Journal of Happiness Studies” contains articles that discuss some relevant issues (Issue 3, 2008, here). In particular, an article by Ad Bergsma examines a sample of best-selling self-help books that have themes relating to personal growth, personal relations, coping with stress and identity. (Authors of the selected books include Gray, Goleman, Dyer, Csiksezentmihalyi and Carnegie). The books were examined to see how closely their messages fit with observed correlates of happiness derived from scientific research. The results seem encouraging. The factors that the books strongly advocate (calmness, independence, internal locus of control, intimacy, love-life and marriage, mental health, self-actualization and tolerance) are nearly all positively correlated with happiness. (The exception is independence, for which results are ambivalent.) The books also strongly recommend against aggression, which has been shown to be negatively correlated with happiness.

Bergsma also refers to research on self-help that has been undertaken by others. This research suggests that most readers of these books are not chronically unhappy. Reading self-help books seems to be part of a coping style of people who are attempting to improve themselves. There is also some evidence that reading problem-focused self-help materials can be effective in the treatment of disorders, and even have outcomes comparable to therapist administered treatments. Bergsma suggests that the books may function in a way that is similar to travel guides: “Most readers will not follow
the book page by page, but will study parts of the book and will select some travel
options they would have never heard of without the book”.

In order to be successful in enabling people to live more happily self-help books would need to encourage people to reflect on their own patterns of thinking and behaviour and to consider whether changes are necessary. That is certainly true of Martin Seligman’s book, “Authentic Happiness” (2002). Seligman suggests: “Insufficient appreciation and savoring of the good events in your past and overemphasis of the bad ones are the two culprits that undermine serenity, contentment, and satisfaction” (70). The remedies he suggests are gratitude, to amplify the savoring and appreciation of the good events gone by, and forgiveness, to loosen the power of bad events to embitter. Seligman also makes many other suggestions, including making an annual appraisal of your life’s trajectory, covering the domains that are of greatest value to you. This accounting “pins you down, leaves little room for self-deception, and tells you when to act” (82).

Some people manage to turn their lives around simply by reflecting on such things as their most positive beliefs, their role models, the things they are grateful for, their goals and their commitments. For some examples, see Let’sReflect (here).

My personal preference for self-help is a process explained by Michael Hall in his book, “Unleashed”. This involves: developing an understanding of your potential; accessing the executive levels of mind to re-construct your intentions; and actualizing your best meanings and intentions in performance. (The approach developed in Hall’s book can be sampled on his self-actualization web site, here.)

There are many different ways in which people can help themselves to live happy lives. The important point to recognise is that it is in our nature as humans to reflect upon our own lives and to seek to improve them. It seems to me that in developing that skill most of us can learn a lot from “travel guides” written by qualified professionals.

An article by Ian Harper which discusses this subject was published in the Australian Financial Review of October 18-19. I have reproduced the article below (with the author's permission) because I believe it deserves to be widely read.

There’s a poignant moment recorded in the New Testament when the Jewish leaders bring a woman caught in the very act of adultery to Jesus. They point to the requirement of the Jewish Law that such a person be stoned to death and demand to know what he thinks. He famously responds that those who have never sinned should be the first to throw stones at her.

It’s all too easy to blame our present troubles on the unbridled greed of high-flying bankers and their financial accomplices. After all, like the hapless adulteress, they too have been caught red-handed. Some people might not even flinch from stoning the perpetrators if they had the option. Absent that, calling for tougher sanctions against greed and recklessness will have to do.

But as Jesus of Nazareth pointed out long ago, it’s impossible to punish sin without condemning every one of us. Who wants to say they’ve never been greedy or behaved recklessly with their own or someone else’s property? It’s one thing to identify greed and imprudence as the basis of the behaviour we decry but quite another to think it can be eliminated by decree. King Canute was wise enough to know the limits of his power over the elements, let alone basic human nature.

So do we just shrug our shoulders and splutter or sigh according to our temperament? Of course not. There will be punishment aplenty as the law slowly sifts through the ashes of this particular bonfire of the vanities. We haven’t even begun to see the class actions mounted by dispossessed shareholders let alone the retributive justice of corporate regulators. Some of the behaviour responsible for the mess we’re in will be shown to be illegal and some people will go to jail. But stupidity is not illegal, nor is making the wrong call on the future growth of house prices.

The law can only protect us from our darker selves up to a point. There is clearly a need, once the dust has settled, to review carefully and dispassionately how various financial rules and regulations failed to protect us from the worst of what we are experiencing and what might be done to avoid a repeat performance. There is a danger, however, in thinking that more and better regulation is the obvious and only answer. How are we better served by rules limiting the earnings of bank executives? Is the fact that senior bankers are paid so much more than the rest of us really at the root of our financial problems? How are we better off if people capable of earning such sums choose to do so outside of banking or outside of Australia? Surely it’s not what they earn that matters but what drives them and restrains them in the decisions they make.

Passing more laws makes little difference if the people making decisions lack the basic virtues of moral courage, prudence and self-control. If you can’t legislate against greed, you also can’tlegislate for moral courage. These virtues must be inculcated through instruction and experience.

Somewhere along the line, virtuous behaviour fell out of fashion. Rather than reaching for alegislative response, we have to think long and hard about how to refill the wells of basic virtue in commercial life which have so evidently run dry. It’s not that there’s no scope for tightening rules and regulations. Rules play a vital role in helping us to make virtuous decisions, often by keeping temptation at bay. Incentives favouring prudence in financial decisions are entirely appropriate and may well need to be strengthened. There is much good sense in the rule applied by one large financial institution in Melbourne that being caught in the casino during work hours carries a penalty of instant dismissal.

But no set of rules can ever completely prevent imprudent decision-making. If decision-makers lack basic self-control and a well-calibrated moral compass, they will not be contained by rules or even threats of severe punishment. It was Paul of Tarsus, another New Testament figure, who lamented that the very thing he detested - the thing he knew was wrong - was the thing he found himself doing. That’s what we’re dealing with here.

Greed, like the other vices, is a perversion of something good. We actually want to encouragepeople to look to their own interests and improve their material circumstances. Innovation, risktaking and entrepreneurship are good things. They make us all better off. We must strenuously avoid confusing the underlying virtues with their perversions. In our efforts to ban greed, we will inevitably overreach and obstruct the virtuous behaviour of prudent risk-taking. In our rush to rail against “obscene” incomes, we run the risk of besmirching legitimate reward for effort and the courage, commitment and fortitude that true enterprise entails.

There is no reason why an enterprise based on virtuous choices can’t make money. Equally it is far from obvious that someone who earns a very large income by community standards is ipso facto immoral. In any case, banning people from earning large salaries is no way to make them moral if they’re immoral to begin with.

Ian Harper is a Senior Consultant with Access Economics and was a member of the Wallis Committee.

Monday, October 13, 2008

Is there anything less useful than AAA ratings of mortgage backed securities by S&P and Moody’s prior to 2006? The obvious answers, like “tits on a bull” or “an ashtray on a motor bike”, don’t deserve a passing grade. Tits on bulls do no harm and it is conceivable that an ashtray on a motor bike might actually be useful (see here).

I can understand some of the important elements that brought about the current financial crisis. With the benefit of hindsight it is now obvious that the U.S. Federal Reserve was allowing excessive credit expansion. A few economists – such as Roger Garrison and Steve Horwitz – are probably entitled to say “I told you so”, but most economists would have to admit that they didn’t think that low interest rates were a problem while consumer price inflation remained low.

I can also understand that government policies in the U.S. that were encouraging financial institutions to relax their lending standards would be likely to lead to an increase in defaults. That should have been obvious to anyone who didn’t come down in the last shower, but as far as I am aware few economists other than Stan Liebowitz and Theodore Day raised objections to the policies that were succeeding in lifting home ownership rates. As early as 1998, Day and Liebowitz warned that the method that government was using to increase home ownership among the poor – weakening underwriting standards so that mortgages required virtually no down payment – would lead to problems. They wrote: “After the warm and fuzzy glow of flexible underwriting standards has worn off, we may discover that they are nothing more than standards that led to bad loans”. The quote comes from an excellent article on causes of the mortgage meltdown that Stan Liebowitz has now written for the Independent Institute (“Anatomy of a train wreck”, October 2008, here).

However, I still can’t understand why the rating agencies would risk their reputations by giving AAA rating to innovative mortgage-backed securities. Liebowitz includes some discussion of the behaviour of rating agencies in his article. He suggests that their behaviour was “shortsighted to the point of incompetence”. The rating agencies were apparently strongly influenced by evidence that default rates on the more risky lending were no higher than on standard mortgages. The problem with that approach is that they derived their evidence solely from the period at the beginning of the housing price bubble. They apparently made no attempt to think about what might happen in the event of a such things as an economy-wide rise in interest rates, fall in house prices or increase in unemployment rates. Liebowitz also mentions that government regulation that requires many financial organizations (e.g. insurance companies and money market funds) to invest in securities that are highly rated by incumbent rating agencies may tend to shield these agencies from competition and make them reluctant “to create political waves by rocking the mortgage boat”.

Perhaps I should just accept that the rating agencies behaved incompetently. But there is something disturbing about the idea that firms that presumably can only exist so long as they maintain reputations for offering a trustworthy service would allow any of the common varieties of human fallibility – such as incompetence and greed – to put those reputations at risk. If a rating agency felt that it lacked the competence to rate a particular security I would have thought that it would be prudent for it to refrain from making a rating until it acquired the necessary competence. It is hard to imagine any organisation that would have a greater incentive to behave prudently than a rating agency. Government regulatory authorities are certainly not faced with such unambiguous incentives to maintain a reputation for prudence and competence.

It seems to me that, unlike the rating agencies, I should admit my incompetence. I do not yet understand why the rating agencies would put their reputations at risk.

Postscript:Steve Horwitz has made the following comment that helps to answer my question:"One reason the agencies rated the bonds so highly is that, thanks to some changes in SEC rules, the agencies switched their audience. For decades, they rated for an audience of investors. But in recent decades, they rated for the SELLERS of the instruments, who would then "agency shop" to get the best rating they could. This gave the agencies strong incentive to rate more highly than justified."

Thursday, October 9, 2008

What is rational behaviour? It seems to me that rational behaviour is simply about making good choices – having the intention to make choices that we are prepared to endorse at a high level of reflection and being prepared to learn from our mistakes.

Economists often assume in their theoretical models that the world is populated by people who are a bit like Dr Spock from Star Wars. In Dan Ariely’s words: “Standard economics assumes that we ... know all the pertinent information about our decisions, that we can calculate the value of the different options we face, and that we are cognitively unhindered in weighing the ramifications of each potential choice” (“Predictably Irrational”: 239). Economists have reasons for making such assumptions in their models, but there are also good reasons why real people don’t behave like this. If we were to attempt to calculate the value of all the options every time we made a decision, the transactions costs (including time required) would be huge. Most of us have better things to do with our lives.

However, some of the evidence that Dan Ariely has presented suggests that humans often fail to make choices that would be capable of passing a much weaker test of rationality. We have predictable tendencies to make mistakes in decision-making and we often tend to make the same mistakes over and over. (I have written previously about Ariely’s book here).

While thinking about the question of whether self-actualization would help people make better choices I decided to revisit “Predictably Irrational” to see if I could find any relevant discussion. My hopes were raised when I found this: “If we all make systematic mistakes in our decisions, then why not develop new strategies, tools and methods to help us make better decisions and improve our overall well-being?” Unfortunately, the discussion that follows is mainly about what governments and employers etc could do to help us rather than about what we can do to help ourselves. However, Ariely does acknowledge that it might be possible for us to help ourselves: “Once we understand when and where we may make erroneous decisions, we can try to be more vigilant, force ourselves to think differently about these decisions, or use technology to overcome our inherent shortcomings” (244).

Why do I think it is worth thinking about whether self-actualization would promote greater rationality in market behaviour? It seems to me that people who rate highly in terms of self-actualization might be more competent in dealing with their own irrational tendencies e.g. in relation to gaps between wanting and liking (discussed here and here) and persuasion techniques used by others (including advertising agencies).

Instruments have been created to measure self-actualization (the POI or personal orientation inventory) and dimensions of personal well-being related to eudaimonia i.e. growth towards achieving the best that is within us and the exercise of practical wisdom. For example, Carol Ryff’s six-factor model of personal well-being covers self-acceptance, autonomy, personal growth, relations with others, purpose in life and environmental mastery (described here). I don’t claim to know much about measurement of such factors, but this model seems to have conceptual coherence. The six factors correspond broadly to the content matrices in Michael Hall’s matrix model (see: “Self-Actualization Psychology”, Chapter 11). (Hall’s matrix model provides a comprehensive framework for considering how the meanings that we attach to self, powers (potential), others, time and the market/environment/context relate to the beliefs, values, understandings, perceptions etc that make up our internal models of the world.)

As far as I am aware research relating to measurement of self-actualization etc. has not yet been used in behavioural economics research. It would be interesting to know whether the aspects of “practical wisdom” being measured in the self-actualization research correspond to enhanced rationality in market behaviour.

Monday, October 6, 2008

John Stuart Mill is often quoted as an authority on the question of whether happiness can be obtained by seeking it. He wrote:

“Those only are happy ... who have their minds fixed on some object other than their own happiness; on the happiness of others, on the improvement of mankind, even on some art or pursuit, followed not as a means, but as itself an ideal end. Aiming thus at something else, they find happiness by the way” (“Autobiography”, here).

How can this view that happiness cannot be obtained by seeking it be reconciled with Mill’s conviction “that happiness is the test of all rules of conduct, and the end of life”? That was no problem for J.S. Mill: “the happiness which forms the utilitarian standard of what is right in conduct, is not the agent's own happiness, but that of all concerned. As between his own happiness and that of others, utilitarianism requires him to be as strictly impartial as a disinterested and benevolent spectator” (“Utilitarianism”, here).

Not content to let that proposition rest on its dubious merits, Mill enlisted the support of a widely-esteemed authority: “In the golden rule of Jesus of Nazareth, we read the complete spirit of the ethics of utility. To do as you would be done by, and to love your neighbour as yourself, constitute the ideal perfection of utilitarian morality”. So there!

Coming back to the original question, it is actually not clear to me that J.S. was strongly of the view that happiness could not be obtained by seeking it. He regarded some pleasures as being higher than others (for my discussion of his views on pushpin and poetry see here and here) and he saw the development of “noble character” as intimately linked to the higher pleasures. At one point he seems to suggest that development of a noble character is an avenue to happiness. He writes: “... if it may be doubted whether a noble character is always the happier for its nobleness, there can be no doubt that it makes other people happier ...” (“Utilitarianism”). His personal experience is also relevant here. He reports that he helped himself to regain some measure of happiness after suffering a nervous breakdown when he was a young man by reading the poetry of William Wordsworth. He wrote:

“What made Wordsworth's poems a medicine for my state of mind, was that they expressed, not mere outward beauty, but states of feeling, and of thought coloured by feeling, under the excitement of beauty. They seemed to be the very culture of the feelings, which I was in quest of” (“Autobiography”). For an example of what Mill was writing about, see this poem by Wordsworth (here).

It seems to me that Mill’s take on the question of whether happiness can be obtained by seeking it stems from his conception of happiness as having to do solely with seeking pleasure and avoiding pain. Mill seems to accept that happiness could be obtained by cultivating tranquillity:

“the conscious ability to do without happiness gives the best prospect of realizing, such happiness as is attainable. For nothing except that consciousness can raise a person above the chances of life, by making him feel that, let fate and fortune do their worst, they have not power to subdue him: which, once felt, frees him from excess of anxiety concerning the evils of life, and enables him, like many a Stoic in the worst times of the Roman Empire, to cultivate in tranquility the sources of satisfaction accessible to him, without concerning himself about the uncertainty of their duration, any more than about their inevitable end”.

In his autobiography Mill reports that it was after his nervous breakdown that he came to the view that personal happiness cannot be obtained by seeking it. Kieran Setiya suggests that Mill displays a lack of self-knowledge because he became unhappy even though he had already met his own condition of aiming not at his own happiness, but at the happiness of others (here). However, my reading of Mill’s account suggests that he saw his problem as stemming from the moment when he asked himself whether he would be happy if all his objects in life were realized. Mill implies that his mistake was to question his own happiness:

“Ask yourself whether you are happy, and you cease to be so. The only chance is to treat, not happiness, but some end external to it, as the purpose of life. Let your self-consciousness, your scrutiny, your self-interrogation, exhaust themselves on that; and if otherwise fortunately circumstanced you will inhale happiness with the air you breathe, without dwelling on it or thinking about it, without either forestalling it in imagination, or putting it to flight by fatal questioning”.

How should we view this? Should we treat it as an assertion that the way to be happy is to live a “meaningful” life? Or, should we treat it as an invitation by Mill to follow his example by avoiding any problems we might have in accepting our emotional states by losing ourselves in furthering causes that seem much more important than our own happiness? Should we view Mill’s fear of self-awareness as a symptom of low self-esteem?

Leaving those questions aside, what is my answer to the question I began with? Can happiness be obtained by seeking it? It seem to me that the answer depends on what you mean by happiness. You do not harm your chances of happiness by seeking to live a good life.

Emancipation

Welcome!

Welcome to Freedom and Flourishing. While you are here, why not take a look around and leave some comments.

There is a list of my most popular posts below. I am pleased that a post about characteristics of a good society, that I wrote in 2009, is still one of the most popular. That post captures some of the ideas about freedom and individual human flourishing that I think are most important.